Site Mobile Navigation

After Brief Calm, Europe Again Worries Over Debt

PARIS — Five months after the United States lost its AAA credit rating, buyers are still flocking to bonds issued by Washington. But in Europe, where the euro zone crisis and chronic economic problems may soon erode the credit scores of big countries like France, Italy and Spain, investors are far more wary.

The euro currency fell to its lowest level in more than 15 months on Thursday, below $1.28. And France had to pay slightly more than in recent auctions to find buyers for its government bonds that mature in 10 years. Those were among fresh signs that the late-December market calm that fell over Europe might not last much longer.

Next week, investors will probably force the Italian and Spanish governments to pay higher borrowing costs in exchange for billions of euros in new loans that the countries must obtain to pay down a mountain of other bonds whose payments will come due shortly.

In trading Thursday, Italy’s existing 10-year bonds crept back up above the 7 percent mark — to 7.09 percent — which is considered an unsustainably high borrowing rate for the Italian government. Spain’s 10-year bonds were also higher Thursday, at 5.64 percent, compared with just over 5 percent at the end of December.

“It’s indicative of the sense that things aren’t great in Europe,” said Jacob Funk Kirkegaard, an economist at the Peterson Institute for International Economics in Washington. “The panic that the euro was bound to collapse in the next six months has subsided, but that doesn’t mean that Europe is in any way out of the line of fire.”

After nearly three years of halting political response to Europe’s crisis, financial markets appear to be paying far closer attention these days to the vigorous efforts by the European Central Bank to prevent the debt problems of most euro zone governments from damaging Europe’s weakened banking system. A new program of low-interest loans to commercial banks that the central bank started in December had contributed to that sense of year-end calm.

But the calm has already been shattered. Trading in shares of Italy’s biggest bank, UniCredit, was suspended Thursday in Milan after the stock lost nearly one-quarter of its value. The stock plunged on concerns that UniCredit might have trouble raising the billions of euros in new capital that regulators are demanding to insulate the bank from any worsening of the European crisis.

Spanish bank stocks were also sharply lower after Luis de Guindos, the new Spanish finance minister, was quoted in a Financial Times interview Thursday saying that Spain’s banks might need to set aside an additional 50 billion euros ($64 billion) to clean up their balance sheets.

And with much of Europe seen as heading into regional recession this year, it is not clear whether the European Central Bank can continue to put out all the fires that keep breaking out across the Continent.

What is more, a new crisis is emerging outside the euro zone, where the European Central Bank does not operate.

Hungary, a member of the European Union but not one of the 17 countries in the euro currency union, was teetering on the brink of collapse Wednesday amid fears that its center-right government was alienating the International Monetary Fund and the European Commission in Brussels at a time when Budapest was hoping for their help.

Photo

Trading in shares of Italy's biggest bank, UniCredit, was suspended in Milan after the stock lost one-quarter of its value.Credit
Alessia Pierdomenico/Bloomberg News

Beset by deteriorating finances and a confrontation between the government and the Hungarian central bank, Budapest’s credit rating was recently cut to junk by two ratings companies. The prime minister, Viktor Orban, recently risked having a monetary fund rescue line cut off when he introduced laws to strip the Hungarian central bank of its political independence.

The developments have unnerved investors, who shied away from buying some of the bonds the Hungarian government offered in a sale Thursday, and forced the nation to pay a higher interest rate to compensate for the risk. Hungary sold only 35 billion forints ($140 million) of the 45 billion forints in one-year Treasury bills it offered Thursday, with the average yield rising sharply to 9.96 percent.

But the main focus of attention remains the immediate problems of the euro zone — especially the ability of Italy, Spain and even France to continue shouldering their rising borrowing costs. When the European Central Bank last month began providing commercial banks with cheap loans for up to three years, one expected the consequence of that action to be that some of the money made available would end up being used to buy government bonds.

That bond buying is expected to help reduce the governments’ borrowing costs, at least for terms shorter than three years. But investors are wary of how Europe’s big economies might fare more than three years from now — which is one reason they are forcing France, Italy, Spain and others to pay higher borrowing costs on 10-year government bonds.

With their finances squeezed, euro zone governments and banks need to raise an estimated 1.9 trillion euros ($2.43 trillion) in new financing in 2012 alone — most of it before April. Many governments need to auction off new bonds, as France did Thursday, to make good on older bonds whose payments are soon due.

Deutsche Bank estimates that euro zone governments have redemptions and coupon payments totaling 486 billion euros in the first quarter of the year, while banks must redeem about 214 billion euros.

It could result in a costly struggle.

“You will have competition for very scarce resources between banks and states,” said João Soares, a senior consultant at Bain & Company, which recently published a report on the situation. “States have more muscle than the banks,” he said. “So the question is, How is this fight going to play out?”

Among the governments bracing for a tsunami of debt rollovers, Spain and Italy are the most vulnerable. In February, the Italian government needs to raise 50 billion euros to pay off expiring bonds, and an additional 80 billion euros between March and April. Spain also has a huge bill coming due.

Mario Monti, Italy’s new prime minister, and Mariano Rajoy, the new prime minister in Spain, have both unleashed new austerity programs in hopes of restoring investor confidence and encouraging the European Central Bank to provide support, at least indirectly, for their bond offerings.

But Mr. Rajoy recently acknowledged that Spain’s deficit was much worse than thought, while Mr. Monti faces public unrest over new measures that many fear will tip Italy into a prolonged recession.

Also competing for huge amounts of financing is the European Financial Stability Facility, the lifeline fund intended to help keep the interest rates of countries like Italy and Spain from rising to the levels that forced Greece to take a bailout.

The fund on Wednesday sold 4.5 billion euros worth of bonds that mature in three years, at a significantly higher interest rate — about 1.77 percent — than it had to pay in its first auction a year ago. The sale was aimed at raising new money to finance the bailouts of Ireland, Portugal and Greece.

President Nicolas Sarkozy of France is scheduled to meet Monday with the German chancellor, Angela Merkel, to confer on strategy for coping with the euro crisis.

David Jolly contributed reporting.

A version of this article appears in print on January 6, 2012, on page B1 of the New York edition with the headline: After Brief Calm, Europe Again Worries Over Debt. Order Reprints|Today's Paper|Subscribe